RBI MPC Meeting: What is RBI repo rate and how does it impact home loan borrowers? Explained

Repo Rate, repurchase agreement, or repurchasing option, is the interest rate at which India's central bank Reserve Bank of India (RBI) gives loans to commercial banks. The current repo rate is 6.50 per cent.

RBI's first Monetary Policy Committee (MPC) meeting of 2024 started on February 6, 2024. The three-day and six-member MPC, led by RBI Governor Shaktikanta Das, will conclude tomorrow and Das will announce the MPC's decision at 10 AM on Thursday, February 8, 2024.

RBI is unlikely to change its repo rate this time, according to market experts. 

As per SBI research report, RBI will maintain a pause approach in its next policy. Strong US non-farm payroll statistics and wages appear to have tempered market expectations for a rapid shift to rate decreases.

RBI had last increased the repo rate by 25 basis points (bps) on February 8, 2023, to 6.50 per cent. It is to be noted that, one basis point is one-hundredth of a percentage point.

Relation between repo rate and home loans

A borrower's home loan and EMI are determined by the repo rate. As the central bank adjusts the repo rate, commercial bank interest rates vary accordingly. A rise in the repo rate will increase home loan EMIs when banks raise their interest rates. This indicates that the borrower will have to pay more than earlier. On the other side, if the RBI reduces the repo rate, banks are required to reduce their interest rates as well. This indicates that the customer will bear less burden of repayment.

"We expect the RBI to continue doing a stellar job of managing inflation. To borrow a cricket analogy, we expect the batsman to play the ball on its merit. The RBI will consider the macroeconomic data and decide its course. The data suggests a rate pause is likely to continue, followed by a cut whenever inflation has softened enough," said Adhil Shetty, CEO, BankBazaar.com.

When asked about the expectation of lower home loan EMI after RBI's repo rate decision, Shetty added that home loan rates have receded from the near 9.00 per cent a few quarters ago. So, rates have already fallen for new borrowers. The market is quite competitively priced today with home loans starting at around 8.35 for eligible borrowers. Several lenders are priced at 8.50 per cent. Those seeking new loans or refinancing existing loans can benefit from these rates. Existing borrowers will not benefit from a continued pause. They will benefit only from a rate cut.

According to Shetty, the RBI has already done quite a lot to make home loans borrower-friendly. The repo rate benchmarking in 2019 has made retail loan pricing much more transparent for borrowers. So, borrowers need not wait for the RBI to do anything now. If they're paying a much higher interest rate compared to what the market is charging today, they should simply refinance their home loan for a lower rate. The costs of refinancing would typically be around 0.5-1 per cent of the amount borrowed. But if the new loan is substantially cheaper, they will recover the costs quickly. A refinance is helpful especially when paying 50-100 basis points above what lenders are charging today, which is 8.35 per cent and upwards for eligible borrowers.